Technology, Innovation and Entrepreneurship, Part I: My World, My Nation

Technology, Innovation and Entrepreneurship

Part I: My World, My Nation

By Patri K. Venuvinod

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Dedication

To Mrudula, my wonderful wife.

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Copyright © 2010 Patri K. Venuvinod

All rights reserved.

Published by Patri K. Venuvinod at Smashwords

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Discover two associated titles by the same author at Smashwords.com:

Technology, Innovation and Entrepreneurship, Part II: My Firm

Technology, Innovation and Entrepreneurship, Part III: My Startup

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Contents

About this Book

Preface

Chapter 1 – Introduction

Human Well-being

Technology

Innovation

Entrepreneurship

Inclusive Economic Growth

Chapter 2 – Techno-Economic History of the World

Ancient to Pre-Industrial Times

The Industrial Revolution

The Present Post-Industrial Era

The Immediate Future

Chapter – 3 The Philosophies of Science and Technology

The Nature of Philosophy

The Natures of Science and Technology

Philosophical Stances Related to Technology

Chapter – 4 Theories of Economic Growth

Classical Growth Theories

Technology and Population Control

Exogenous Growth Theories

Endogenous Growth Theories

Chapter – 5 Economic Downturns

Empirical Data on Economic Fluctuations

Economic Downswing-Upswing Sequences

Types of Business Cycles

The Origins of Business Cycles

Preparing for the Next Economic Downturn

Does Innovation go on Vacation during an Economic Downturn?

Chapter – 6 Theories of Technological Progress

Incremental and Radical Innovation

Types of Technological Innovation

Sectoral Patterns of Innovation

Technology S-curves

Technology Push

Market Pull

Technological Regimes and Paradigms

Technological Trajectories

Technology Accumulation and Transfer

Evolutionary Models of Technical Change

Chapter – 7 Technology and National Development

National Economic Development: A Framework

Goal 1: Maximize Human Development

Governance

Goal 2: Eradicate Poverty

Goal 3: Minimize Inequality

Chapter – 8 National Culture

What is Culture?

National Cultures

Occupational Cultures

Contents of Parts II and III

About the Author

Connect Online with the Author

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About this Book

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Thomas Jefferson said [E]very generation needs a new revolution. The revolution for the generations in the first half of the 20th century was socialism/communism. For the generations of the second half of the same century, it was the return to capitalism. For the current generation, it seems to be entrepreneurialism.

Three insights concerning economic growth have become clear in recent times. First, the key to economic growth is technology (T). Secondly, innovation (I) is the driver of technology growth. Finally, entrepreneurship (E) is a highly powerful but extremely underappreciated contributor to innovation. Yet, there continues a paucity of academic books covering the large variety of issues impinging on TIE-exploitation from a contemporary viewpoint. This book is the third and final part of a textbook-trilogy that seeks to fill this gap.

The first part (this book) is titled My World, My Nation as it examines TIE interactions from a world-perspective but stressing nation building. Part II: My Firm discusses how an established firm could prosper in the contemporary world of globalized competition and technology. Part III: My Startup discusses issues of particular interest to the growing number of youth pursuing an entrepreneurial career.

The origins of this trilogy lie in the class notes compiled by the author while teaching 'Management of Technological Innovation' to undergraduate and graduate students from science, engineering and business departments. The final contents have been influenced strongly by the insights derived by him while living and working in India, the UK, Hong Kong (including extensive travels to mainland China), and the USA. Thus, rather than focusing just on the lessons to be learnt from the experiences of a developed country such as the USA (as most books on the themes examined do), this trilogy empathizes with the biases and concerns of the developing parts of the world as well.

Among the topics examined in this book (Part I) are the techno-economic history of the world, the philosophies of science and technology, the industrial revolution, theories of economic growth, economic downturns, and the roles of technology and culture in national development.

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Preface

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My childhood was spent in a small Indian township housing the largest Asian sugar factory of the time. Yet the town didn’t even have a primary school. Consequently, I couldn’t receive formal education till I turned nine. Only then could I be trusted to lug my school bag across water-laden paddy fields to a small government school located in a larger neighboring town.

The difference between the two towns was palpable. In keeping with their rural setting, people in my school-town were mostly steeped in age-old traditions, and religious or caste rivalries. This was in sharp contrast with the people in the industrial township I lived who tended to temper blind belief with rationality, dogma with pluralism, and disorder with organization. This contrast provided me with my earliest practical lesson in the power of technology as a vehicle for bringing forth social transformation.

My technicism led to a dilemma, though, as I approached graduation from my high school and started thinking about what I could/should become. The choice was obvious for most of my classmates. A farmer’s son would become a farmer, a grocer’s a grocer, and a feudal landlord’s a landlord. Being a technologist’s son, none of these choices was immediately available to me. In any case, all were unexciting.

Meanwhile, independent India was struggling to find its road ahead. The Father of the Nation, Mahatma Gandhi, passionately advocated a bottom-up, village-oriented approach underpinned by altruism. Technology was accorded only a peripheral role, if at all.

But, Gandhi’s influence was already waning as that of Jawaharlal Nehru was rising. As India’s prime Minister for seventeen years, Nehru pursued a national development strategy based on socialistic principles and central planning. (During his formative years, Marx’s works were well-known while Schumpeter had not written his counter-thesis yet. Schumpeter gained some fame by the time Nehru became the prime minister. But, apparently, Nehru’s mind had set by then.) Nehru also acknowledged the central role of technology in development and created a range of public sector industries which became vehicles for technology transfer mainly from the Soviet bloc. Taking cue from this trend, I joined an engineering college in the state capital in the hope of eventually becoming a public sector employee.

One of the few non-technical subjects we had to study was Economics. One would have thought that the syllabus of this subject reflected the prevailing Marxist bias. As it happened, the books prescribed dwelt essentially on classical capitalism. Further, my teacher was an eloquent laissez-faire enthusiast. All this exposed to me to the flipside of Nehru’s strategy: it was ignoring the role of the individual through personal enterprise. In fact, individual entrepreneurship was being discouraged through elaborate licensing requirements. This didn’t bother me since I, like most of my compatriots, believed that no public good can come out of greedy individuals.

Immediately upon obtaining my engineering degree, I proceeded to one of the premier institutes of technology in the country to specialize in design and production engineering. The particular institute I joined was set up with Soviet collaboration, so a good number of my professors were from the U.S.S.R. I learnt a lot about mechanical technologies from them but little about the new developments that were occurring in electronics and computers. There was also little curricular emphasis on the human and market sides of engineering.

My association with Russians and the like didn’t end there as the UNESCO expert from the Soviet Union assessing my masters' thesis reacted favorably to it. He started persuading me to take up academic career at a newly established Regional Engineering College. The idea was that I would assist him on developing the curricula for eight post-graduate programs in technology across India. I agreed.

Over the next few years, I got associated with many more experts from the Soviet Union and Eastern Europe. From them I learnt more about technology and their countries where vertically integrated industries were producing the goods that the respective governments thought their citizens needed.

Next, I was selected to go to the U.K. as a UNESCO fellow to work on my Ph.D. The personal niche in technology (metal cutting) research I was to find there was to remain with me for the rest of my professional life. While in the U.K., I also spent some time at an ILO institute in Italy and secured a deeper appreciation of the role of technology in economic growth. These experiences helped me develop a more secular, and global outlook.

Upon receiving my research degree, I returned to my previous place of employment in India. The aura of my ‘foreign’ PhD helped intensify my research activity. It also made it easier for me to initiate several non-curricular learning activities amongst students. For instance, noting that the college’s curricula had not included management science as a subject of formal study, I organized interested students into what we called the Management Studies Group. Not everyone was happy, though, with our enthusiasm for management science. For instance, during an address to the group, the main message of our Principal was that ‘management’ was no more than a euphemism for worker-exploitation. Many others were also offended as the campus was rapidly becoming a hotbed of communism. The resulting tensions made me think about finding a place more conducive to academic pursuits.

A few years later, I moved to Hong Kong—then still a British colony. I worked at two different polytechnic-universities. At the first, I obtained a broad understanding of how Hong Kong ticked. Hong Kong was very different from India or the U.K. While India was still struggling to find its path and the U.K. was past its prime at least in terms of world domination in technology, Hong Kong was fast becoming a prominent ‘Asian Tiger’ despite being just a city state without any natural resources and little industrial history. It had already acquired international reputation in finance and manufacturing. In terms of manufacturing, it had developed well past the era of Productivity (P) into the era of Quality (Q). It achieved all this by pursuing free market capitalism based on thousands of horizontally integrated small and medium-sized private enterprises. The government assiduously pursued a hands-off policy believing that other social problems would be mitigated automatically as economic prosperity is achieved. The reliance on personal enterprise (entrepreneurship) seemed to infuse many a young person with confidence in the future. These observations made me more sensitive to the power of individual entrepreneurship in economic growth. I also became convinced of the importance of creativity and broad-based education in the preparation of youth for entrepreneurial careers.

All this preparation proved to be particularly useful when I became the founding head of the Department of Manufacturing Engineering at a newly formed polytechnic-university in Hong Kong. I promptly set in motion several curricular and pedagogic experiments. The results only confirmed my convictions.

My 25-year stay in Hong Kong also provided me with ample opportunities not only to learn about but also to interact with mainland China. When I first arrived in Hong Kong, China had just embarked on a journey that was to lift some half a billion people out of poverty within the next 30 years. I had the good fortune of being chosen as a member of the first international delegation organized by some Hong Kong elders to visit China after Deng Xiaoping had declared China’s Open Doors Policy. This was only the first of many similar trips to come.

When I first went to South China, I found the place in a shambles following the self-inflicted injuries during the Cultural Revolution. Yet, today, the region is a thriving industrial complex actively contributing to China’s well-earned reputation as the factory of the world.

As I noticed during my subsequent trips to different parts of China, this was mainly the consequence of technological advancement resulting from technology transfer underpinned by unprecedented openness. Equally importantly, it was because the government managed to release the entrepreneurial energies of individuals without —putting overall political stability in serious jeopardy. China was also wise in adopting the unprecedented one country, two systems policy with regard to post-1997 Hong Kong. The policy has already yielded rich dividends—Hong Kong’s industrialists have been providing between 50 and 70% of FDI in China.

The above political developments suggested to us that our department’s programs and curricula would have to recognize not only the local aspirations of Hong Kong but also how the territory could contribute to the rest of China. In particular, we had to take into account the fact that Hong Kong needed to move on to the era of Innovation (I). Keeping this in mind, we sought to broaden our program portfolio beyond manufacturing engineering in a manner that would enable students to equip themselves for the coming era of innovation and entrepreneurship. We also introduced, for the first time in Asia, a bachelor’s program in Mechatronic Engineering and a master’s program in Engineering Management. The former emphasized the design of products and processes involving the integration of mechanical, electronic and computer elements. The latter sought to convert engineers into managers capable of conceiving and operating technology-intensive firms and startups. For over ten years, I personally taught the subject of Management of Technological Innovation (MTI) to both engineering and non-engineering students drawn from sub-degree to doctoral levels.

A major problem I encountered while teaching MTI was that there was no suitable textbook to support my teaching. Whereas I was seeking to examine technology, innovation and entrepreneurship (TIE) in fair detail and in an integrated manner, the existing text books focused on the management of the first while treating the latter two only in a cursory manner. Clearly, there was a need for a new book. It was then that I set upon writing this trilogy.

It took me several years of personal research and learning to come to grips with the book’s contents. I embarked upon such an exercise immediately upon retiring from active service in Hong Kong and setting up residence in the U.S. My work was significantly helped by the fact that my immediate circle in the U.S. included several young, budding entrepreneurs. I learnt a lot by keenly observing their entrepreneurial trials and tribulations.

Upon retirement from formal teaching, I tried to disseminate in India the TIE lessons I had learnt abroad. I managed to bring together over twenty engineering colleges in and around Hyderabad to collaborate under the umbrella of International Organization of Developing Universities (IODevUni). One of the projects initiated by the Chapter was the application of the emerging e-learning technologies to facilitate the teaching of subjects for which member-colleges did not have enough experts.

E-learning enables students to learn anywhere at the pace, time and location of their choosing. The contents of an e-book itself can be updated frequently. One can also use the power of the Internet to build and sustain a learning community around the particular professor/subject. The learning community itself can contribute material such as case studies, adaptation to local and current conditions, and so forth. This is why this trilogy is being offered first in the form of e-books and a website called tecinnovent.com has been set up in its support.

This trilogy is based on five premises that seem to hold in any economy irrespective of the ‘ism’ being followed:

~ The key to economic growth is productivity improvement through improved technology.

~ Innovation drives technology growth.

~ Competition spurs innovation.

~ Entrepreneurship consummates innovation.

~ The above four premises are equally applicable at the levels of nation-building, managing an existing firm, as well as launching a new venture or a startup.

The first four premises resonate with the recent arguments made by Edmund Phelps, 2006 winner of Nobel Prize for Economics, that general knowledge—encompassing business, technology, and the economic environment at large—is an important enabler of the virtuous circle of creativity, innovation, and growth.

Following the last premise, this work is organized into three parts, each devoted to one of these three levels. The picture on the cover page seeks to capture the way each part is addressed. The shape of the central structure in the picture is inspired by Wilson Hall of Fermilab situated close to the author’s residence in the suburbs of Chicago (see picture below). Till very recently, Fermilab had been housing the largest particle accelerator in the world. Thus it captures the central role of systematic science. Systematic science of course is the springboard for a great deal of modern technology.

Adapted from Fermilab website.

The central structure is made up of three parts labeled Technology (T), Innovation (I), and Entrepreneurship (E). This, of course, is in agreement with this trilogy’s title. However, the intention is not just to examine T, I and E as themes worth studying in their own right, but also to ‘tie’ them together in a purposeful manner. Nations, firms and professionals who understand how the three elements can be synergistically united will enjoy a clear competitive advantage in the modern, globalized world. This emphasis on pulling T, I, and E together so as to beat the competition is reflected by the black belt around the central structure’s ‘waist’.

Part I consisting of Chapters 1 to 8 is titled ‘My World, My Nation’ as it explores the theme of TIE from a world-perspective but stressing nation-building. As citizens of the world and of a specific nation we all engage in animated discussions about some aspect or other of current trends and events in the world. This part aims to make such discussions more informed and purposeful. The issues discussed should be of particular interest to public officials/workers and those at executive levels.

Part II (Chapters 9 to 17) is titled ‘My Firm’ as it discusses the TIE theme from the perspective of how an existing firm or organization could prosper in the contemporary world of globalized competition. The issues discussed should be of particular interest to professionals and managers at all levels.

Part III (Chapters 18 to 26), titled ‘My Startup’, focuses on issues of particular importance to the growing number of youth across the world seeking an entrepreneurial career. It should also be of interest to serial entrepreneurs and intrapreneurs (mentors of entrepreneurial employees).

Although much of the material covered in the present trilogy is available in other books, few have put all of them together. The trilogy also includes several segments drawing on the author’s research.

An examination of literature on the subject of TIE reveals a variety of discursive approaches. Some rely on a selection of case studies to find commonalities to arrive at a list of do’s and don’ts. Some choose a particular sociopolitical belief system, e.g., capitalism or socialism, and use it to theorize. The method adopted in this trilogy is neither. The term ‘evidence-based reasoning’ captures the preferred mode of discussion.

Although the trilogy adopts an academic writing style, it should be useful to working professionals as well as general readers in addition to university students and researchers. It is not necessary that all the chapters are covered in a single semester. Depending on the course objectives, one can pick and choose chapters. There is enough material in the trilogy to engage students for 2 to 3 semesters.

Patri, K. Venuvinod

Emeritus Professor

City University of Hong Kong

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Chapter 1

Introduction

"[P]eople use the word ‘guru’ only because ‘charlatan’ is too long."

—Peter F. Drucker, the Father of Modern Management

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Human Well-being

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Conscious pursuit of one’s own survival and well-being is a hallmark of mankind. Almost all of us constantly strive to promote our own well-being or that of our near and dear ones. But it is not easy to pin down human well-being as it is made up many components, the most important being health, prosperity and that elusive entity called ‘happiness’. According to the noted American psychologist, Abraham Maslow (1943), the degree of individual happiness at any given time critically depends on the subject’s ability to satisfy his/her physiological, security, belonging, esteem, and self-actualization needs, in that order. Most people seem to work on the assumption that the process of meeting all the human needs is linked, either directly or indirectly, to human material prosperity. Obviously, one can find several psychological, ethical and philosophical arguments against adopting this assumption unconditionally. But it is undeniable that most people generally act as if the terms ‘happiness’ and ‘material prosperity’ are synonymous. A more tempered view is that, while happiness is not proportional to the wealth one possesses, one can’t really be happy without a certain minimum of material support.

Economic Growth

Consider now how human material prosperity has changed over the millennia. A commonly used measure for the material prosperity of a nation is the gross domestic product (GDP) expressed in terms of a specified currency at a certain time divided by the population of the country at the time of the output. This measure, called GDP per capita, is in extensive use today.

Figures 1.1a and b show the historical trends of world population and world GDP in 1990 US$ as compiled by Bradford DeLong, Professor of Economics at U.C. Berkeley. Figure 1.1c shows the trend of GDP per capita as calculated from the data underlying Figures 1.1a and b. It is an easy step to calculate from these trends the annual rate of change in the average GDP per capita across the world (see Figure 1.1d).

It can be seen from Figure 1.1c that humanity has progressed enormously in economic terms in recent times. The graph reveals a clear transition from slow growth to fast growth around the middle of the 18th century. For millennia before that time the average GDP per capita across the world had remained under US$0.70 per day, a figure well below the poverty line stipulated these days by the United Nations. This means that, except for a few feudal lords and their close associates, almost everyone around the world was wretchedly poor by today’s standards. Further there was little hope as the annual economic growth rarely exceeded a fraction of one percent.

But, fortunately since the 18th century transition, many countries in the world started witnessing explosive growth—to the extent that, just a century later, the world as a whole was experiencing between 2 and 8% annual growth. As a result, the proportion of people living below the extreme poverty line decreased to 52% in 1981, to 42% in 1990, and to 26% in 2005. As a result, the middle class grew to the extent that many can now enjoy luxuries that once were available only to the ruling classes.

On the other hand, unfortunately, the story is not totally benign. We can see from Figure 1.1d that the dramatic growth rate since the transition has also been accompanied by more rapid economic fluctuations. A more detailed examination of the data for the period 1700 to 2010 reveals that some of the fluctuations have been very serious, e.g., the Great Depression of the 1930s and the 2008 global financial crisis. Both have had grave consequences in the form of high unemployment, stock market crashes, home foreclosures (mainly in the U.S.), and so forth. However, fortunately, after each economic crisis, the world quickly arrived at an economic position superior to that existing when the crisis had started. This means that the broad principles (whatever they are) underlying the long-term economic growth depicted in Figure 1.1c continue to be valid but with the caveat that societies should not let greed overcome prudence and one must always be prepared for a severe economic downturn.

The origins of the transition to fast economic growth have been debated widely. It is now commonly agreed that the transition was characterized by an unprecedented cluster of technological developments that took place in Western Europe, the most commonly cited one being the development of the steam engine in 1765 by a Scottish inventor by name James Watt. These and subsequent technological developments are now commonly referred to as the ‘Industrial Revolution (IR)’.

The consequences of the IR have been profound. Before the revolution, agriculture was the main economic activity. The IR added manufacturing to it through the development of mechanically powered machinery located in factories away from workers’ homes. A little later, machinery became electrically powered which further accelerated economic growth. In time, more and more countries joined the game. As the middle class grew, the service sector was added to the agricultural and manufacturing sectors. By the middle of the 20th century, developments in information and communication technologies (ICT)—mainframe computers, personal computers, the internet, and so forth—heralded the information age. A major outcome of the ICT revolution was business and cultural globalization (Venuvinod et al., 1998).

It is not that new technologies were not being developed prior to the IR. Indeed there were many technological developments even in ancient times, e.g., artificial fire, the wheel. But these were few and far between as the mechanisms for knowledge transmission from one tribe to another were missing. What is significant about the post-IR period is the high clustering of inventions followed by more rapid commercialization of selected inventions.

Technology is the Key to Economic Growth

Why does technology development improve the economy? Nobel Prize-winning economist, Robert Solow, was among the first to address this question quantitatively. A simplified version of his theory (Solow, 1956, 1957, 1970) assumes that the total production of material wealth in a given economy, Y, can be expressed as

Y=Ka(ATL)¹-a│0≤a≤1

where L is labor, K is capital (the money needed for acquiring the land, buildings, hardware, software etc. to sustain production), and AT and a are empirically determined constants (see Figure 1.2).

The real role of technology however becomes apparent when we examine the empirically determined behavior of AT. Solow found that a significant part of economic growth could not be accounted by known increases in K and L. This suggested that the unexplained part, the so-called Solow residual, could only be accounted for through an increase in AT. Solow then went on to interpret AT as being equivalent to total factor productivity, Tm, a parameter that accounts for all contributions to total production including and beyond those reflected in K and L.

Often, total factor productivity is interpreted as reflecting the way in which technological innovation allows capital and labor to be used in more effective and valuable ways. For example, the development of word-processing software has greatly increased efficiency compared to the use of typewriters. Typewriters themselves represented a huge productive advance over clerical work using pen and paper. This process of improved technological methods has resulted in an increase in labor productivity. More recently, other economists have suggested that further factors—good institutions that support markets, innovations in the organization of work, or access to global markets—should be thought of as equally important in promoting economic growth and, hence, should be folded into Tm.

Whatever be the interpretation of Tm, doubling the multifactor productivity doubles Y since its index is equal to 1. Conclusion: Rapid economic progress is not possible without investing in new technology and establishing a cultural and institutional environment conducive to technology assimilation and development.

Figure 1.3 illustrates some growth accounting results for the U.S. in the period 1929–1987. Note that the government was a negative factor actually reducing the output by some 9%. Imagine what would have happened in a totalitarian country!

By sharp contrast, technological progress was the most important positive factor. Other estimates of the contribution of technical change to U.S. growth vary from 33% to 78% depending on the assumptions. Table 1.1 shows some results comparing the U.S. to a selection of other countries. Figure 1.4a illustrates the effect of technology on national prosperity for a selection of 102 countries. Note the strong exponential relationship—the exponential index is 1.11.

Innovation Drives Technology Growth

Whoever be the developer, all technology development starts with someone getting a new idea. More often than not, a group of people belonging to a profit-oriented firm collaborate to convert the idea into a commercially profitable reality. In recent times, it has become common to use the term ‘innovation’ while referring to the conception, invention and commercial exploitation of new ideas. Technology and innovation together constitute the primary key to economic growth. Box 1.1 shows some recent survey findings underscoring this point.

Clearly, the greater the innovative spirit of a region, the greater the scope and potential for technology development and utilization in the region. For Mokyr (1990), technological creativity is the lever of riches that forms the very basis of the rise of the West. That this is indeed true is confirmed by Figure 1.4b which illustrates the correlation between the innovation sub-index and technology index data collected by the World Economic Forum (WEF) in 2005 for 99 countries presented in (WEF, 2005). Note that innovation has a greater effect on technology utilization when the country is less advanced technologically. One can’t be sure however which is the cause and which the effect. It is perhaps safer to say that there is a mutually reinforcing relationship between the two. Consequently, as Alvin Toffler said Technology feeds on itself. Technology makes more technology possible.

All the above implies that the study of the economic and commercial exploitation of technology and innovation should be of great benefit to any public leader, corporate professional, or entrepreneur. This is why the title of this book starts with the words Technology and Innovation.

However, notwithstanding the obvious importance of technology, the recognition of ‘Technology and Innovation’ as the primary key to economic growth is nowhere near being universal: Technical change is like God. It is much discussed, worshipped by some, rejected by others, but little understood... At the individual level, we all love technology for the security, comfort, convenience, power and social-status it brings. At an abstract collective level, we hate it for our inability to understand and control it. We are deeply aware of the havoc wrought by technology through wars and environmental degradation. But, at a more concrete level, we hate technology for amplifying the economic disparities amongst groups of people, particularly if we are among the have-nots (Thomson, 1984, p. 243, as quoted in Mokyr, 1990).

For instance, India’s Mahatma Gandhi built an ethically-based anti-technology stance and movement which unwittingly had a confusing influence on many Indian students, teachers, engineers, bureaucrats and so forth of the time. To that extent the economic progress of India was delayed. (The present author was one of such youth and it took him decades to get over the confusion.)

Further, much of the rivalry between capitalism and socialism that dominated world politics during the 20th century seems to have downplayed the role of innovation in economic development. By the end of that century however, pure socialism gave way to democratic capitalism in much of the world. Pure socialism focused on the collective as opposed to the individual. But, as it turned out, it was not the so-called ‘collective’ that was ruling but a few elite who took over the reins claiming that they represent the collective. To sustain themselves in power, the ‘few elite’ had to suppress individual creativity.

But individual creativity sustained by an appropriate institutional framework is the fountainhead of innovation. Naturally, ideological believers in Marxist socialism (e.g., the former U.S.S.R. and China) could not compete in economic terms with market-oriented capitalist countries (e.g., the U.S.) until they managed to abandon undiluted socialism. This lesson from the protracted rivalry between autocratic socialism and democratic capitalism is yet to sink in fully across the world.

Competition Spurs Innovation

Let us now turn to the question What drives innovation? The resounding response must be competition. Innovation is about realizing something new. Newness implies that one doesn’t know in advance whether one would succeed. As a result of this uncertainty, innovation is always accompanied by risk.

So why do people engage in innovation? There are two reasons. The first is greed. If we do succeed, innovation can lead us to rich rewards. There is always a great deal of profit to be made by being the first mover. Most startups are motivated by this constructive type of greed.

The second reason is fear, the fear of competition in particular. If you sit still by not innovating, sooner or later someone will come up with a better product or service and wipe you out of the market. Most well-established firms engage in innovation because of this negative reason. Simply speaking, they follow the adage innovate or perish. Boxes 1.2 and 1.3 recount the stories of two well-known companies (Wang Laboratories, and General Motors) that have perished or come to the brink because they had become lax at innovation.

Either way it is clear that innovation doesn’t flourish in the absence of competition. Hindsight shows that societies that stifled internal competition through nationalization of industries have not done as well as societies nurturing internal competition. As noted earlier, collectivization leads to restrictions on individual freedom thus stifling competition. As a result, more and more countries today (including many that had favored collectivization earlier) are taking active steps to make their societies ever more